Shariah Board Independence, Deferred Profit and Misused Investment Account Funds

Weaknesses:

1. Independence and conflict of interest. A member chairing a takaful company that reinsures conventionally, and holding shares in a client of the bank, cannot be seen to judge impartially. The conventional reinsurance also raises a takaful-compliance question the bank may be indirectly exposed to.
2. Insufficient oversight cadence. Two meetings a year cannot review a live product pipeline.
3. Rubber-stamping. Fatwas drafted by the product team and signed without recorded deliberation means the SSB is not exercising independent judgement; the audit trail will not withstand regulatory scrutiny.
4. No visible escalation path from Shariah audit to the SSB.

Remedies within 60 days:

• Require written disclosure of interests; recuse the member from the istisna file and any takaful transaction; assess whether resignation from one role is required.
• Increase meetings to at least quarterly plus ad hoc sessions, with minutes recording discussion and dissent.
• Establish an SSB secretariat, with products submitted before launch and an approval checklist.
• Make internal Shariah audit report to the SSB, not to business lines.
• Notify the regulator of the remediation steps.

Murabaha profit. Profit on a murabaha is recognised over the term of the contract, not at inception. The USD 450,000 must be split between earned and deferred profit; only the portion attributable to elapsed time is income at the reporting date. If, for illustration, four of 24 months had elapsed, roughly USD 75,000 would be recognised and USD 375,000 held as deferred profit, with the deferred amount released as instalments fall due. Where an instalment is delinquent, recognition may need to be suspended under AAOIFI rules. The prior-period error must be reversed, disclosed and explained, and the general ledger configuration for murabaha checked to stop recurrence.

Restricted investment account. RIA funds are held in a fiduciary capacity; they are not the bank's money. Charging the bank's general and administrative expenses to a USD 12 million RIA is a breach of the mudarib's or wakil's duty. The bank must reimburse the account, restate the affected investor statements, allocate only directly attributable and agreed expenses, and obtain SSB ratification of the corrected method. Both items require disclosure to investors and the regulator.

The conflict must be handled through disclosure, recusal and review, not simply by a verbal assurance.

1. Disclose the chairmanship of the takaful company and the shareholding in the construction firm to the board and to the regulator, in writing.
2. Recuse the member from all decisions touching the istisna facility, any takaful transaction and any matter involving the construction firm, and record the recusal in the minutes.
3. Review past decisions. Examine transactions approved while the member participated, verify arm's-length pricing and documentation, and have the remaining members ratify or correct them.
4. Decide on tenure. If the conflict is structural, require the member to resign from one of the roles; a part-time board cannot police a full-time commercial interest.
5. Institutionalise. Adopt a conflict-of-interest policy, an annual independence declaration, and fit-and-proper criteria, with the SSB's report to shareholders explaining how independence is safeguarded.